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Rm. A. R. Ar. Rm. A. R. Ramanathan Chettiar Vs. Commissioner of Income-tax, Madras. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No.144 of 1960 (Reference No. 62 of 1960)
Reported in[1963]50ITR43(Mad)
AppellantRm. A. R. Ar. Rm. A. R. Ramanathan Chettiar
RespondentCommissioner of Income-tax, Madras.
Cases ReferredWestminster Bank v. Riches.
- jagadisan j. - this is an income-tax reference arising under the following circumstances. one arunachalam chettiar (senior), a resident of devakottah, owned a large extent of properties of great value in ceylon. he had three wives, valami achi, lakshmi achi and nachiar achi. valami achi died as early as 1913, leaving behind her a son, arunachala (junior), and three daughters; lakshmi achi and nachiar achi had no issues. arunachala (junior) died on the 9th july, 1934, and arunachala (senior) died on the 23rd february, 1938. he was survived by his two wives, lakshmi achi and nachiar achi and by umayal achi, the widow of his predeceased son, arunachala (junior). disputes arose between these three widows, two of them, the widows of arunachala (senior) and the other widow of arunachala.....

JAGADISAN J. - This is an income-tax reference arising under the following circumstances. One Arunachalam Chettiar (senior), a resident of Devakottah, owned a large extent of properties of great value in Ceylon. He had three wives, Valami Achi, Lakshmi Achi and Nachiar Achi. Valami Achi died as early as 1913, leaving behind her a son, Arunachala (junior), and three daughters; Lakshmi Achi and Nachiar Achi had no issues. Arunachala (junior) died on the 9th July, 1934, and Arunachala (senior) died on the 23rd February, 1938. He was survived by his two wives, Lakshmi Achi and Nachiar Achi and by Umayal Achi, the widow of his predeceased son, Arunachala (junior). Disputes arose between these three widows, two of them, the widows of Arunachala (senior) and the other widow of Arunachala (junior). They formed the subject-matter of the suit in O. S. No. 93 of 1938, on the file of the Sub-Court, Devakottah. During the pendency of that suit, the estate was placed in custodia legis and two advocates practising at Devakottah were appointed as receivers. On the death of Arunachala (junior) the estate duty authorities of Ceylon levied duty on what was described as 'the deceaseds half-share of the assets of the business carried on by the family in Ceylon.' Estate duty was also levied on the death of Arunachala (senior) in 1938. The receivers of the estate of Arunachala called in question the levy of the estate duty. The Supreme Court of Ceylon upheld the contention of the receivers and held that no estate duty was leviable. The Attorney-General of Ceylon took the matter by way of an appeal to the Privy Council in Privy Council Appeals Nos. 16 and 17 of 1955. Their Lordships of the Judicial Committee of the Privy Council by judgment dated the 10th July, 1957, affirmed the decision of the Supreme Court of Ceylon and dismissed the appeals. In consequence of this litigation the estate duty authorities of Ceylon had to refund to the estate of the deceased, Arunachala Chettiar (senior), a sum of Rs. 7,97,072, as interest payable on the amount of estate duty wrongly collected. It must be mentioned that the persons in charge of the estate of Arunachalam Chettiar had paid the estate duty immediately after it was levied and demanded to be paid by the concerned authorities.

Now the litigation in O. S. No. 93 of 1938, on the file of the Sub Court of Devakottah dragged on and ultimately after several vicissitudes reached the Privy Council. At that stage the parties thought it prudent to enter into a compromise and accordingly effected a settlement of their dispute inter se. In pursuance of this compromise the two widows of Arunachala (senior) took a boy each in adoption on the 17th June, 1945, Lakshmi Achi taking in adoption one Arunachala, Nachiar Achi taking in adoption one Ramanathan. The widow of Arunachala (junior), Umayal Achi, also adopted a son to her deceased husband, a boy called Veerappa on the 17th June, 1945. The estate was divided into three equal shares, Lakshmi Achi and her adopted son taking one, third, Nachiar Achi and her adopted son taking another one-third and Umayal Achi and her adopted son, Veerappa, taking the balance of one-third.

Ramanathan, the adopted son of Arunachalam Chettiar (senior), taken in adoption by his widow, Nachiar Achi, was assessed to income-tax for the assessment year 1958-59, the relevant 'previous year' being the year ended 31st March, 1958. He was assessed in the status of a Hindu undivided family on a total income of Rs. 2,53,828, and a total tax of Rs. 1,79,412-12-0 was levied. This assessment included inter alia a sum of Rs. 1,93,328 as 'foreign income share in common account'. This sum of Rs. 1,93,328 was received by the assessee as his one-third share of the amount of interest paid by the estate duty authorities consequent on the order of the Supreme Court of Ceylon directing refund of the estate duty paid. The total sum of interest paid by the authorities was Rs. 7,97,072 as representing interest payment on the estate duty wrongly collected. From this a sum of Rs. 2,17,087 was deducted by way of legal charges and expenses incurred in the proceedings, which culminated in the appeal before the Privy Council. The balance, Rs. 5,79,985, was apportioned equally between the three sharers, the three adopted sons and their adoptive mothers, and thus the assessee, Ramanathan, became entitled to Rs. 1,93,328. It is to the inclusion of this amount that the assessee objected, his contention being that it is not a revenue receipt assessable to income-tax, and that, in any event, the receipt is of a casual and non-recurring nature, falling within the exemption of section 4(3)(vii) of the Act. The Income-tax Officer overruled the said objection and as stated already included it as part of the assessable amount. The assessees appeal to the Appellate Assistant Commissioner and a further appeal to the Income-tax Appellate Tribunal were unsuccessful. Before the Tribunal the assessee contended that the amount was not income, but was only damages received for the unlawful retention of the money belonging to the estate by the Ceylon estate duty authorities, and that it was of a casual and non-recurring nature exempt under the Act. These contentions were overruled by the Tribunal. On an application preferred by the assessee for reference of questions of law to this court the following questions have been referred :

'1. Whether the aforesaid interest receipt constitutes income ?

2. If so, whether it is exempted under section 4(3)(vii) of the Income-tax Act as a receipt of a casual, non-recurring nature ?

We shall first consider the question whether the receipt of Rs. 1,93,328 can be taxed as income under the Act. This amount was paid by the Ceylon estate duty authorities under the judgment and decree of the Supreme Court of Ceylon which was subsequently affirmed by the Judicial Committee. The amount received is strictly and literally interest on the amount of estate duty wrongly collected by the authorities on a misapplication of the estate duty law in Ceylon. A brief reference to the provisions of the Estate Duty Act in Ceylon, as it obtained at the time when the representatives of the estate of Arunachalam Chettiar challenged the levy of duty, would show that in form and in substance the amount of estate duty wrongly paid together with interest on that amount was collected by the process of a decree of court. Any person aggrieved by the amount of any assessment of estate duty could appeal to the appropriate District Court. The person desiring to appeal should within thirty days after the date of notice of the impugned assessment deliver to the Commissioner a written notice of objection which should set out the specific grounds on which the assessment was challenged as erroneous. On receipt of this notice of objection the Commissioner should notify to the assessee whether he is withdrawing the claim to estate duty or whether he was determined to maintain the assessment in whole or in part. At any time within thirty days after the date of the notification by the Commissioner of his determination to maintain the assessment the assessee may file a petition of appeal to the appropriate District Court naming the Attorney-General as the respondent to his petition. After the Attorney-General is served in the matter, the appeal should be deemed to be and may be proceeded with as an action between the assessee as plaintiff and the Crown as defendant. The statute specifically provides that the provisions of the Code of Civil Procedure and of the Stamp Ordinance shall apply to the proceedings. The petition of appeal shall be stamped as though it were a plaint filed for the purpose of originating the action, and if it is not stamped with the requisite stamps it may be dealt with in the same manner as if it is a plaint which is insufficiently stamped. Any party aggrieved by any decree or order of the District Court may further appeal to the Supreme court in accordance with the provisions of the Code of Civil Procedure. It is plain that the Procedure prescribed for a person assessed to estate duty to get rid of the assessment is just like a civil suit instituted for recovery of money. The provisions of the Civil Procedure Code have been made applicable and the court granting a decree in favour of the assessee for refund of the money can of course make provision for payment of interest from the date of institution of the suit till realisation. The relevant provision under the Ceylon Civil Procedure Code clothing the court with jurisdiction to award interest is contained in section 192 of Ordinance II of 1889. That reads :

'When the action is for a sum of money due to the plaintiff, the court may in the decree order interest according to the rate agreed on between the parties by the instrument sued on, or in the absence of any such agreement at the rate of nine per cent. per annum to be paid on the principal sum adjudged from the date of the action to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the action, with further interest at such rate on the aggregate sum so adjudged, from the date of the decree to the date of payment, or to such earlier date as the court thinks fit...'

This provision corresponds to section 34 of our Code of Civil Procedure.

Learned counsel for the assessee contends that the payment of interest by the authorities in pursuance of the decree of court was something in the nature of award of compensation or damages for wrongful collection of estate duty, and that it should not be treated as fulfilment of any obligation by the authorities to pay interest under a contract of loan, express or implied. In ordinary parlance the word 'interest' connotes a payment by a debtor to a creditor as a consideration for the use of the money borrowed. In all cases of transactions of loan there is usually an express stipulation to pay interest at a stipulated rate per cent. per annum. Sometimes provision is also made for payment of interest on interest if the debtor defaults to pay interest periodically as per the terms of the contract. In cases of this description, where a creditor receives interest on moneys advanced, it cannot be contended that the interest receipt is anything else except income. The origin of the notion of interest however seems to rest on the foundation that the creditor, parting with the amount by lending it out to the debtor, should be compensated for the loss of the use of his money during the time when the debtor has its use and until such time as the debtor repays it. In England under the common law interest was allowed only by way of damages where the debt arose out of the bill of exchange or where interest was payable by trade or usage. In cases of wrongful detention of money, the equity courts allowed interest as damages. Under section 28 of the Civil Procedure Code of 1833, the jury were enabled, if they thought fit, to allow interest to the successful plaintiff in a limited class of cases, that is, where the debt was a sum certain under a contract in writing payable at a time certain, or if otherwise made payable by a demand in writing fixing a certain date and notifying the debtor that in default interest would be claimed. Section 29 enabled the jury to give damages 'in the nature of interest' in certain torts and also claims upon policies of insurance. The Law Reform (Miscellaneous Provisions) Act, 1934, provided under section 3(1) that in any proceedings tried in any court of record for the recovery of any debt or damage the court may, if it thinks fit, order that there shall be included in the sum for which the judgment is given interest at such a rate as it thinks fit on the whole or any part of the debt or damages for the whole or any part of the period between the date when the cause of action arose and the judgment. This is substantially the provision now contained in section 34 of the Civil Procedure Code. When a plaintiff brought an action against his debtor for repayment of the debt, he claimed in addition to the debt the benefit which he lost by the non-payment, and it was computed by calculating what profits he could have made by lending the money with a stipulation for the payment of a periodical sum for the use of it. Thus the damages for the wrongful detention of money became equivalent to the agreed payment for a loan (Earl Jowitt, Dictionary of English Law, page 974).

The stipulation to pay interest at a fixed rate on the amount borrowed has its roots in the compensation due to the lender for the injury suffered by him by parting with the money. It can be stated that the quantum of interest is the liquidated damages ascertained and agreed to between the creditor and the debtor arising out of the lending transaction and due to the creditor by the debtor. But whatever may be the origin and history of interest payment, it ought not to be confused with 'damages', a legal expression which extended to cover a vast range of claims not relating to transactions of loans or deposits of money.

The character and nature of interest receipt was thus described by Lord Normand in Westminster Bank v. Riches quoting with approval the following definition of that term in Bells Dictionary :

'Interest of money may be defined to be the creditors share of the profit which the borrower or debtor is presumed to make from the use of the money.'

In our opinion no useful purpose will be served by designating a particular receipt as interest or damages, as the decisive factor is whether it is of 'capital' or 'income' nature. The assessability to tax of a particular amount cannot of course be determined by mere terminology. A wrong label of 'interest' or 'damages' given to a receipt would neither avail to avoid or to attract tax. The true and essential question is not how the assessee or the department would choose to describe a particular receipt, but what the receipt really is, whether it is capital or income. In considering this question, it must be remembered that the character of the sum paid ought not to be mixed up and confused with the authority under which it is paid. Interest may become due and payable under a contract or by statute or by judicial award. It is true that the underlying basic conception of the right to receive interest is recompense to a person who allows or suffers the use of his money by another. The receipt of interest is plainly a result or product or gain proceeding from capital, and if so it is essentially income.

We shall now therefore address ourselves to the question whether the receipt of Rs. 1,93,328 by the assessee was a capital receipt or an income receipt. Many cases were cited at the Bar both by the learned counsel for the assessee and by the learned counsel for the department on the question whether we should view the receipt as one by way of interest strictly and properly so called. We have already pointed out that the proper way to approach the question is not to select the label which one should give to the receipt, whether it is interest or damages, but that the endeavour should be to ascertain its true character, namely, whether it is capital or income. A reference to the decided cases in England shows that the court never attached any importance to the description of the amount in deciding the question of its taxability. In Commissioners of Inland Revenue v. Ballentine, there was a claim before the arbitrators for 'additional costs, loss and damages', and there was an award made by the arbitrators for an amount which included a sum described as interest. The Court of Session (Scotland) held that what was described as interest was in fact part of the total sum awarded by way of damages, and rejected the claim of the revenue to tax upon it. In Glenboig Union Fireclay Co. v. Commissioners of Inland Revenue certain sums were described as interest; yet in substance they were capital sum of compensation awarded. The claim to tax was rejected, the court being of the opinion that the element of interest was introduced in modern estimationis. Cases on the subject are numerous and in our opinion it will not be profitable to wade through them as the real principle to be adopted in deciding cases of this description is now fairly clear and as the decision in each case merely turned upon the application of that principle to the facts and circumstances of the case. We would, however, like to refer to the decision of the House of Lords in Westminster Bank v. Riches, as some of the observations of the learned Law Lords in that case give a clear indication of the right approach to solve the problem now before us.

The facts of that case were as follows : R brought an action against the Westminster Bank as judicial trustees of X. R claimed to be entitled under an agreement with X to a half-share in the profits realised by X on the purchase and resale of certain shares. The court awarded R the sum of Pound 36,255 as representing moneys due to him. After the judgment an application was made by R to the court to exercise its discretion under section 3 of the Law Reform (Miscellaneous Provisions) Act of 1934, which empowers the court in any proceedings for the recovery of any debt or damages to award interest at such rate as it thinks fit. In exercise of this discretion, the court awarded R a further sum of Pound 10,028, representing interest on Pound 36,255 at four per cent. from 20th June, 1936, to 14th May, 1943. The question was whether the amount of Pound 10,025 was 'interest of money' within Schedule D and general rule 21 of the Income Tax Act of 1918. It was held that it was interest of money and that income tax was accordingly deductible therefrom.

At page 194, Lord Simonds observes thus :

'Whether the principal sum for which judgment is given is in respect of debt or damages, interest may be awarded in respect of that sum. This may be contrasted with the earlier statute, which by section 28 provided for the allowance of interest simpliciter but by section 29 provided for the giving of damages in the nature of interest. I should not be prepared to concede that it makes any difference for the purpose of income tax, whether a sum of money is called interest or damages in the nature of interest.... Its essential character may be the same, whether it is paid under the compulsion of a contract, a statute or a judgment of the court. In the first case it may be called interest and in the second and third cases damages in the nature of interest or even damages. But the real question is still what is its intrinsic character, and in the consideration of this question a description due to the authority under which it is paid may well mislead.'

At page 195, Simonds Lord Justice observes thus :

'My Lords, having discussed in a general way the nature of a sum of money awarded as interest under section 28 of the Civil Procedure Act, I turn to the cases decided under the Income Tax Acts to see whether they assist the appellant. I find in them just what I expected to find. The question in each case is whether the receipt is of an income or a capital nature : that is the test for income tax purposes, not whether it is called interest or damages.'

At page 198, Lord Normand stated the legal position thus :

'This matter of terminology is, however, of no great importance, for the liability of a payment to income tax does not depend on whether or not it is a payment of damages, but on whether or not it is received as income.'

We have no doubt that this is the correct principle which is to be adopted in determining the present question whether the disputed amount is taxable or not. In applying this principle we should never be misled by the mere fact that the court awarded interest and the amount received by the assessee was due to that award, nor should we delve into the foundation or the historical genesis of payment of interest either in common law or in equity. To say that because the money was paid and received by way of interest as such under the decree of the Ceylon Court it is income would be as much erroneous as to say that because the payment of such interest is referable to a payment of compensation or damages for the wrongful detention of the money by the estate duty authorities it would be capital.

The English case referred to above has been followed with approval by the Patna High Court in Commissioner of Income-tax v. Maharajadhiraj Sir Kameshwar Singh . The assessee in that case was the owner of a textile mill. The manager of the mill sold away the machinery and a sum of Rs. 13,363 was due to the assessee from him on this account. During the accounting year the assessee realised as a result of litigation between him and the manager a sum of Rs. 25,530 which included the principal, interest and other expenses. The income-tax authorities calculated the interest to be Rs. 10,497 and taxed the amount in the assessees hands. The assessee contended that the amount was not taxable, because it was not interest but was only in the nature of damages for retention of money. He also contended that the receipt was of a casual and non-recurring nature falling within section 4(3)(vii) of the Act. The High Court held that the sum of Rs. 10,497 was income as it constituted interest on the sale proceeds, which the manager ought to have made over to the assessee, and that it was not a casual or a non-recurring receipt. At page 220, Ramaswami J., as he then was, observes :

'It was said that in the present case the amount of Rs. 10,497 was not interest in the proper sense but was compensation estimated and measured in terms of interest and was not, therefore, taxable under the Income-tax Act. In my opinion, the argument of the learned counsel proceeds upon a misconception.....'

Again at page 221 :

'The question is not whether the amount in dispute is interest in its proper sense or interest by way of damages, but the question is whether the amount is of an income or capital nature. In the present case the textile mills were sold by Gokulchand who retained the sale proceeds and did not make them over to the assessee. A suit was brought and ultimately the assessee was granted a decree for Rs. 25,530 which included the principal amount of Rs. 13,363 and interest calculated to be Rs. 10,497 and certain other expenses...... But the amount is nevertheless income for the reason that it constitutes interest on the sale proceeds which Gokulchand ought to have made over to the Maharajah...... This opinion is supported by the decision of the House of Lords in Westminster Bank v. Riches.

A wrongful collection of tax by the Crown or the State gives rise to an obligation or liability to refund on declaration that the levy is illegal. After such declaration the liability assumes the character of a debt, enforceable at law. An action for refund of the money collected under the guise of tax is essentially one for the money had and received, whether the cause of action can be deemed to rest on the implied contract, or on the principle of ex aequo et bono (in equity and good conscience). Interest awarded by the court and provided for in the decree in such an action cannot partake of the same character as the tax amount directed to be repaid or be categorised as an independent head of claim or damages for any injury caused by the sovereign power. It is nothing but the ordinary adjunct to an unpaid debt. We are unable to invest the decretal payment of interest with the character of a compensatory payment having the attributes of capital and not income.

The next question is whether the receipt, even if income, is exempt under the provisions of section 4(3)(vii) of the Act. This provision is in the following terms :

'Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them :... (vii) any receipts not being capital gains chargeable according to the provisions of section 12B and not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature, or are not by way of addition to the remuneration of an employee.'

Unless the receipt is both casual and non-recurring the exemption is not attracted. If it is not casual, non-recurrence alone will not do. In the present case it can be readily assumed that the condition of non-recurring character is fully satisfied. We have, therefore, to see whether the receipt is casual. Whatever depends upon chance or accident is 'casual'. A casual thing happens without anybody knowing that it will happen and without anybody having been able to predict it. It is beyond human calculation and its striking feature is the uncertainty that surrounds it to the last. It is the very antithesis of things foreseen and anticipated. Anything which is within the area of expectancy and which can be foreseen cannot aptly be described as casual. Lottery prizes and betting and gambling gains are good illustrations of casual receipts. Professional book-makers who accept bets on horses are taxable on the profits of what has been held to be their vocation. But the gains of one who is not a book-maker, made by betting are not considered to be assessable income even though the transactions are numerous and carried on over lengthy periods. The receipt of interest in the present case by virtue of the decree of the Supreme Court of Ceylon bears no resemblance to a casual receipt. When the lis commenced by way of a petition in the District Court of Ceylon, it was well within the contemplation and anticipation of the persons representing the estate that a successful termination of the cause would not merely bring in the tax illegally collected, but would also make the Crown liable to pay interest on that amount from the date of petition till the date of payment. In the Dharbanga case decided by the Patna High Court, already cited, the question whether receipt of interest awarded under a decree of court was of a casual and non-recurring nature was also considered. The High Court held that the provisions of section 4(3)(vii) of the Act were not applicable. At page 224, the learned judge observes thus :

'The expression casual has not been defined in the Act and must, therefore, be construed in its plain and ordinary sense. According to the Oxford English Dictionary, the word casual is defined to mean (a) subject to, depending on, or produced by, chance; (b) occurring at uncertain times, not to be calculated on. A receipt of interest which is foreseen and anticipated cannot be regarded as casual even if it is not likely to recur again.'

With this observation we respectfully agree. In our opinion, the amount is not exempt from taxation under section 4(3)(vii) of the Act.

Learned counsel for the assessee raised a further contention before us that the payment was only to the estate of the deceased, Arunachalam Chettiar, and that it would not constitute a receipt by the assessee. The argument is that the assessee received his share only as part of the estate of the deceased, Arunachala. This question does not arise out of the order of the Tribunal and the questions referred to us for decision do not cover this ground. It is not open to the assessee to urge it now before us. But we may also observe that there is hardly any substance in this contention. The interest payment enured only in favour of the persons who shared the estate of the deceased, Arunachala. The benefit of such payment accrued to them only in their individual capacity. The estate duty itself became payable only after the death of the last owner of the estate and a claim by the successor of the estate resisting the collection of the duty should only be attributed to his personal capacity. In the matter of receipt of the interest, it cannot be said that the persons who received it did so in any representative character.

Both the questions are answered against the assessee, who will pay the costs of the department. Counsels fee Rs. 250.

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